Friday, August 28, 2009

Since we like to look at both sides of the argument, we thought it would be prudent to highlight a potential bullish scenario as identified by technical analysis. This comes after we just earlier today looked at two reasons to be bearish.

The bullish scenario stems from a potential inverse head and shoulders and levels identified by Fibonacci retracements. Here's the video that outlines the potential scenario. (Unfamiliar with Fibonacci? Watch this educational video).

A screenshot we've taken from the video highlights that the retracement tool was drawn from the highs of October last year to the lows of March of this year. By placing it as such, it identifies four potential fibonacci retracements at S&P 500 levels of: 878, 1011, 1119, and 1227. We are currently floating around the 38.2% retracement of 1011 and looks like we may head higher. When the market initially flew past the 23.6% retracement at S&P 878, we noticed that it came back down and tested that level. That level held and the market was propelled higher. The next stop in terms of retracements where we might see resistance is 1119 and after that, 1227. If the potential inverse head and shoulders plays out to fruition, then 1227 on the S&P would be a likely upside target.

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The guys over at MarketClub have done a nice job of walking you through everything so you really only need to watch the first half of the Fibonacci retracement video. While we are not bullish at this moment, we want to be clear that it's always prudent to examine both sides of the argument. (After all, Doug Kass called a top in the market for this year). One of our favorite sayings is that the market can remain irrational longer than you can remain solvent. Hedge fund manager Paul Tudor Jones likes to let the market guide him and that's exactly what we'll do here.

.... At the very least for the short-term. While we could throw out all kinds of economic data and a laundry list of fundamental problems, we instead want to focus on two market related datapoints. Firstly, short interest was recently released and the fine folks over at Bespoke have highlighted that, "the average short interest as a percentage of float for stocks in the S&P 1500 is currently at 6.9% This is the lowest level since February 2007." They also point out that extremes typically happen in each polar direction. When short interest is high and all the late-to-the-party bears have arrived, the market can run. Conversely, when short interest is at the lows, be scared.

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That information all but ties into what hedge fund manager Doug Kass highlighted recently: everyone is bullish and rushing into stocks. Mutual fund inflows have risen and they have put their new cash to work while hedge funds have had their highest net long exposure in some time.

The second datapoint we want to highlight is not so much data as it is a flowchart of market possibilities. Specifically, we are talking about the four stages of secular bear markets. Barry Ritholtz over at the Big Picture has posted up an excellent chart that illustrates just that.

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As you can see, it argues that we are almost out of the 'rebound rally' phase of the secular bear market. What's on deck next, you might ask? A roughly anticipated 25% correction downwards, assuming this is a secular bear market. That's a whole 'nother debate but we wanted to post up these interesting tidbits as we start to become cautious ourselves. After all, the market is up over 50% since the March 2009 lows. While such caution is most likely warranted, we could be early with such sentiment. (Forgive us for such a sin as 'being early' ... we attribute this to the volatile market of 2007-08 that has scarred us for life). And as always, we are reminded that markets can remain irrational longer than you can remain solvent. In the mean time, our list for reasons to be bearish continues to grow.

As an addendum to the above article, we thought we'd link back to a post we wrote essentially at 'the (tradeable) bottom' on March 9th, 2009 entitled 'Ranting, Raving & Contrarian Signals'. (Maybe it's time for another contrarian piece in the opposite direction). [market folly]

Thursday, August 27, 2009

Please note that we don't typically like to post 'rumors' here at Market Folly as we usually focus on concrete information such as SEC filings and investor letters. So, obviously take everything in this post with a grain of salt. However, we believe the sources to be reliable/credible and as such have decided to post them.

The NY Post has a piece up stating that John Paulson's hedge fund Paulson & Co has slowly acquired a 2% ownership stake in Citigroup (C) over the past few weeks. Sources in the story say that Paulson has bought because he believes that Citi's assets are undervalued. He apparently sees shares worth book value and thinks they should trade between $5-7 per share. With his new stake, Paulson would also join the US Government, who owns roughly 34% of Citigroup.

This comes after last week when we revealed that Paulson's hedge fund had amassed large stakes in numerous financials including Bank of America (BAC), Capital One (COF), Goldman Sachs (GS), JPMorgan (JPM), and Regions Financial (RF) amongst many others. You can view a summary of Paulson's new financial additions here. We'll of course continue to monitor the situation and will post up any other concrete information we receive. (Know something we don't? Get in contact with us).

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Philip Falcone's Harbinger Capital Partners. They are a $6 billion hedge fund that started back in 2000 with $25 million in seed capital from Harbert Management. Recently, Falcone bought out Harbert to gain ownership of Harbinger. And, he is 'commemorating' his purchase by returning to his roots and launching a new Harbinger hedge fund focused on distressed assets. Harbinger returned 117% in 2007 when Falcone notoriously shorted subprime mortgages. His investment style focuses on intensive research on credit, bankruptcies and proxy fights. While he obviously holds equity positions, Falcone definitely is well versed in different asset classes.

However, despite Falcone's investing acumen, Harbinger Capital Partners lost over 60% of their assets on a year over year basis as their portfolio was down 22.7% for 2008. Poor performance and redemptions landed Harbinger in the number one slot on the list of top 10 asset losers. While the 13F details their most recently portfolio changes, we've already covered a lot of the movements right when they happened since we also track 13D and 13G filings. This is the benefit of focusing on the full gamut of SEC filings rather than just the 13F. As we've been covering on the blog, Harbinger has been decreasing their Cliffs Natural Resources (CLF) position, selling off some of their Calpine (CPN), and most recently amended their 13D on SkyTerra. Lastly, they've also been selling shares of Solutia (SOA) as if it were going out of style. We haven't covered their performance in a while but as of the end of March they were up 4.06%.

The following were Harbinger's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions(Brand new positions that they initiated in the last quarter):Freeport McMoran (FCX)Teck Resources (TCK)Ultrashort Financials (SKF)Zapata (ZAP) - we had already covered their new ZAP position via their 13D filingLegg Mason (LM)

Some Reduced Positions (Some positions they sold some shares of)Cliffs Resources (CLF): Reduced by 94%Atlas Air Worldwide (AAWW): Reduced by 60.7%Solutia (SOA): Reduced by 55.5% (and they continue to sell this position as we've documented in our coverage of their 13D filing)Calpine (CPN): Reduced by 28.3%

Removed Positions (Positions they sold out of completely)Consol Energy (CNX)Hughes Communications (HUGH)The rest of the positions they sold out of were less than 0.15% of their portfolio each:MDC Partners (MDCA)Weatherford International (WFT)Direxion 3x Bear Financials (FAZ)ICO Global (ICOG)

Top 15 Holdings by percentage of long portfolio *(see note below regarding calculations)

Calpine (CPN): 37.7% of portfolio

Leap Wireless (LEAP): 14.85% of portfolio

McDermott (MDR): 10.36% of portfolio

NY Times (NYT): 10.10% of portfolio

Atlas Air Worldwide (AAWW): 4.27% of portfolio

Solutia (SOA): 3.52% of portfolio

Terrestar (TSTR): 3.25% of portfolio

Freeport McMoran (FCX): 3.22% of portfolio

Constellation Energy (CEG): 2.89% of portfolio

Teck Resources (TCK): 1.77% of portfolio

Ultrashort Financial (SKF): 1.68% of portfolio

Zapata (ZAP): 1.45% of portfolio

Medivation (MDVN): 1.15% of portfolio

Legg Mason (LM): 0.81% of portfolio

Cliffs Resources (CLF): 0.71% of portfolio

Harbinger typically runs a pretty concentrated equity portfolio and this quarter is no different. They focus in on their best ideas and try to institute change and drum up shareholder value through various methods.

In terms of brand new positions, we can't help but notice their fondness for natural resources and mining plays Freeport McMoran (FCX) and Teck Resources (TCK). Both have rallied substantially from their lows and Harbinger started new stakes in each. FCX is Harbinger's 8th largest long equity position while TCK is their 10th. In the past, Harbinger had a huge stake in another miner, Cliffs Resources (CLF). While they still hold their position today, it is not nearly as large as it once was considering they just sold 94% of their position. We'll be interested to see if they ratchet their new positions up further in the future as they could possibly see these companies as takeover targets in an industry that seems to always be filled with merger rumors. But after the sour taste left in their mouth from the CLF merger debacle, Harbinger will be cautious not to let that happen again.

Also possibly worth highlighting is the fact that they added the Ultrashort Financials exchange traded fund SKF. This is the second prominent hedge fund we've seen do so in the latest round of 13F filings. (John Paulson bought a ton of financials and then hedged it with SKF). We will be quick to point out that these leveraged inverse ETFs suffer tracking problems the longer you hold them. They replicate the daily performance of their underlying index and as such suffer compounding complications over time. They do what they are designed to do well (track daily performance), but they are best used for quick trades. They can absolutely fly if things start to heat up in the markets. For instance, last October and November in the markets when the financials were tanking, SKF was up 10-15% on what seemed like a daily basis, which is an easy profit. That potential profit though, comes with lots of inherent risk so make sure you're aware of how the instrument operates. We're highlighting Harbinger's entrance into this play as it gives us a look at their potential directional bets. They could have established this for a few reasons: they think financials have rallied too hard recently, they are more bearish on a macro level, or they simply want a hedge for downside protection should things get ugly again. Hell, it could have just been a trade that happened to show up during the 13F reporting period... who knows. Nonetheless, it's interesting to see. Their SKF position is 1.68% of their long US equity portfolio.

While we've outlined all of Harbinger's long equity positions above, keep in mind that they were as of June 30th, 2009. Please note that since that date, they have filed various 13D, 13G, and Form 4's with the SEC as it seems they are constantly shuffling their portfolio. Those newer filings update their portfolio with more recent information and we just wanted to insert that cautionary note for those really tracking these funds in-depth. We typically try and cover all their filings on the blog but would still recommend checking out the latest movements from Harbinger as filed with the SEC here.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $1.5 billion this quarter compared to $1.4 billion last quarter. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

Noted shortseller and Seabreeze Partners hedge fund manager Doug Kass has had impeccable timing recently. Market timing is a b*tch, but Kass has flipped that statement upside-down and made the market his b*tch. Back on the March lows, Kass was calling 'the bottom' and buying when everyone else was calling for the end of the world. This time around, he's calling for a top in the market for the year and has been assembling a short position. His contrarianism is the polar opposite this time around as he writes, "To most investors, today the fear of being in has now been eclipsed by the fear of being out as the animal spirits are in full force. Bears are now scarce to nonexistent in the face of steady price gains in equity and credit prices. As if the movie is now being shown in reverse, the bull is persistent, stock corrections are remarkably shallow, cash reserves at mutual funds have been depleted, and hedge funds hold their highest net long positions in many moons."

We first noted Kass' bearishness a few weeks ago and he has since deepened his stance. He brings up great points and it really has all the elements of another great contrarian call. Time will tell and we'll wait and see. Back in the beginning of March, we penned a piece entitled, Ranting, Raving & Contrarian Signals to highlight the extreme bearish sentiment as if the world was imploding. We have been considering penning a piece again on this topic, only in reverse. Looks as if Kass has beat us to it and we'll gladly let him take that honor.

His point about mutual fund inflows is exactly what we were recently looking at as well and we tweeted about these inflows. Many a contrarian will say that when the retail/'dumb' money rushes in, it is time to get out. Another interesting statistic was the fact that hedge funds have had high net long exposures for the first time in forever. And, as we also tweeted about, hedge funds were *buying* financials hand over fist the past few quarters. Today, we also saw a unicorn and bigfoot; that's how crazy things have been getting.

In order for the market to truly recover, many fundamental problems must be addressed. Kass outlines his signs needed for a market recovery and it's a great reference to have. But in the mean time, he lists 10 things that will weigh on the economy:

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

He ends this list by stating that he is looking, "over the visible green shoots of recovery toward a hostile assault of nonconventional factors that few business/credit cycles and even fewer investors have ever witnessed."

Now that you've seen the rationale for Kass' shift in sentiment, we now want to turn our focus to a timeline of Kass' sentiment as compiled by our friend FirstAdopter. We've mentioned our 'tweets' a few times in this article and we further want to highlight the utility of Twitter as it pertains to financial markets. The rest of this article is a guest post by FirstAdopter, whose blog and twitter we've been following for some time now.

Doug Kass is widely regarded as the guy that called the exact bottom in March by Barrons, New York Times, and CNBC anchors. Here are some tweets from his Twitter Feed. I will let them speak for themselves:

SP500 August 26th 12:17PM: 1027

SP500 August 10th: 1007

SP500 August 5th: 1003

SP500 July 28th: 980

SP500 July 22nd: 954

SP500 July 2nd: 896

SP500 June 19th: 921

SP500 May 8th: 929

SP500 April 29th: 874

SP500 April 16th: 865

SP500 March 26th: 833

SP500 March 18th: 794

Actual Low Close of SP500 March 9th: 677

SP500 February 26th: 753

SP500 February 18th: 788

SP500 February 12th: 835

So there you have it, Kass calls the top and is bearish for now. We'll wait and see if he has made not one, but two amazing market calls within the span of a year. Thanks again to FirstAdopter for the guest post. You can follow his blog here and his twitter here. Make sure to also follow @marketfolly on twitter and to follow @DougKass on twitter as well.

Hopefully this highlights the great quick insight you can gain in 140 characters or less via the Twitter platform. There's an entire finance focused group of posters on there (including yours truly) that has assembled via the great community at Stocktwits, so definitely check it out and join in (Also see our post on Stocktwits & Twitter here).

Last, but certainly not least, make sure you read Kass' latest piece where he elaborates on his 'top' call.

Here's an excellent in-depth read from Goldman Sachs that ties directly into our tracking of hedge fund movements. And we say this because the majority of their data was taken from SEC filings and public disclosures, exactly what we track here on Market Folly. In the report, they specifically focus on hedge fund re-risking and the fact that these funds now have net long exposure near levels unseen in a long time.

Some interesting tidbits we took away from the piece are as follows:

- Hedge funds now own 3.7% of the financial sector's market capitalization.

- Hedge funds boosted ownership in financials by 55% on a quarter over quarter basis, to $70 billion.

- They favored Bank of America (BAC) as the number of funds owning it doubled (quarter over quarter). JPMorgan Chase (JPM) was the second favorite. This echoes what we have been seeing in our 13F analysis. Notable fund managers like Dan Loeb (Third Point) and John Paulson (Paulson & Co) loaded up on shares of BAC, among many other prominent managers. It really is almost astounding how many big names piled into this play over the last quarter.

Those are just a few of the major talking points, but there is a ton of great information in this report and if you enjoy reading our posts on a daily basis then you'll love this report, hands down. Email readers please come to the blog to view the embedded document below.

If you would like to download the .pdf, you can easily do so via this link. Please be aware that Market Folly is not the one hosting this document and hat tip to that individual for doing so. And as always, make sure to check out our hedge fund portfolio tracking series as we update it daily.

Wednesday, August 26, 2009

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Lee Ainslie's hedge fund firm Maverick Capital. Ainslie learned his ways under the guidance of hedge fund legend Julian Robertson and is a member of the Tiger Cub family. (For those of you unfamiliar, a Tiger Cub is a manager who once worked at legendary Tiger Management and eventually started their own fund. You can view a Tiger Cub family tree here). As such, Maverick is a part of the Tiger Cub portfolio clone created with Alphaclone that is seeing great returns and is comprised of holdings widely held by all of the Tiger Cub hedge funds.

Specifically, Maverick manages over $5 billion and focuses on straight up stock picking on both the long and short sides of the portfolio. However, they do not put on pairs trades. They have six industry heads and each team handles their respective sector. Risk management is a big focus at Maverick and position sizes don't normally get above 5-8% of the portfolio. They use a value yet growth at a reasonable price (GARP) tolerable investing style and they like to compare enterprise value to sustainable free cash flow. They have had great historical performance, but suffered in 2008 where their Maverick Fund was -26.2% for the year. For a more in-depth look at this hedge fund, head on over and check out our profile/biography on Lee Ainslie & Maverick.

The following were Maverick's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Top 15 Holdings by percentage of long portfolio *(see note below regarding calculations)

Apple (AAPL): 3.85% of portfolio

Wyeth (WYE): 3.65% of portfolio

Cognizant Technology (CTSH): 3.32% of portfolio

Hewlett Packard (HPQ): 3.18% of portfolio

Pepsico (PEP): 3.16% of portfolio

Walgreen (WAG): 3.01% of portfolio

Lorillard (LO): 2.66% of portfolio

Progressive (PGR): 2.57% of portfolio

Staples (SPLS): 2.54% of portfolio

Liberty Media (LMDIA): 2.53% of portfolio

Gap (GPS): 2.52% of portfolio

Netapp (NTAP): 2.37% of portfolio

XTO Energy (XTO): 2.37% of portfolio

Covidien (COV): 2.21% of portfolio

Gilead Sciences (GILD): 2.17% of portfolio

Like Stephen Mandel of Lone Pine, fellow Tiger Cub Lee Ainslie was out buying large cap names with very visible brands. He added Hewlett Packard (HPQ), Staples (SPLS), and The Gap (GPS) all as brand new positions and brought them up to their 4th, 9th, and 11th largest holdings respectively. Maverick's top position is Apple (AAPL) which they largely left untouched. Shares of AAPL have surged 33% from the end of March until the end of June (the time period elapsed between disclosure dates) and as such has appreciated its way up to their top holding. When we last looked at Maverick's portfolio from Q1 2009, it was their 3rd largest holding.

Wyeth (WYE) also ranks highly in their portfolio as Maverick is playing the risk arbitrage game here along with a ton of other hedge funds. They boosted their stake in this name by 31% over the past quarter as well. Keep in mind that their WYE long is most likely only one leg of the trade they have on in this arbitrage play.

Sticking to the 'play the financials' meme that so many hedge funds have adhered to last quarter, Maverick boosted their position in JPMorgan (JPM) by over 85%. We highlight this because we have seen a very visible trend amongst the various hedge fund 13F filings. John Paulson bought Bank of America (BAC) in a big way, as did Dan Loeb of Third Point, among many other hedge funds.

In terms of selling, we wanted to point out that over the past quarter Lee Ainslie's fund sold completely out of numerous positions that we had previously known as 'hedge fund darlings,' i.e. they were stocks owned by many hedge funds (and most often other Tiger Cubs). Maverick completely dumped Qualcomm (QCOM), Fidelity National Information (FIS), Thermo Fisher Scientific (TMO), and American Tower (AMT). In particular, QCOM and AMT have long been Tiger Cub favorite picks. This is where the divergences start to get interesting as other Tiger Cub funds still hold AMT while Maverick is out of it now.

On the contrary, we see they doubled their stake in America Movil (AMX). This transaction works conversely in that practically all of the ex-Tiger funds owned AMX and then sold out of it. Stephen Mandel's Lone Pine was the only one who continued to hold a position of size. So, contrary to most of his Tiger peers, Ainslie has now boosed his AMX stake. Even though it is not in the top 15 holdings, we thought it was worth pointing out. The Tiger Cubs often have very similar portfolios, so we like to highlight the divergences we see along the way.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $6.4 billion this quarter compared to $5.5 billion last quarter, so a large increase on a quarter by quarter basis. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

We have a trifecta of SEC filings to cover regarding Barry Rosenstein's hedge fund Jana Partners in this update. While they are three separate filings, they all relate to Jana's position in Convergys (CVG). So, let's dive right in as Jana Partners has filed 2 Form 4's and 1 amended 13D. The main thing to take away here is that they continue to sell shares of CVG. The first Form 4 shows them selling shares on August 3rd, 4th, and 5th at prices ranging from $10.21 to $10.45 per share. In total, they sold 1,989,295 shares in that filing. In an additional Form 4, we see that they sold another 236,095 shares on August 6th, with the bulk of the sale at $10.19 per share. Sandwiched in between the two Form 4 filings was an amended 13D that shows Jana holding a 6.6% ownership stake in Convergys. After all is said and done, they now are left with 8,118,418 shares of CVG. We covered Jana's initial 13D filing back in February and detailed the numerous times they've sold CVG shares as well.

Other notable activity out of Jana includes selling more Coleman Cable (CCIX). Lastly, we've also highlighted their activity in PRG-Schultz and Immucor. These moves all come after Jana saw redemption requests for around 30% of their assets, which can obviously present some problems. They have set aside illiquid positions and have been re-shuffling things for a few months now. Barry Rosenstein uses long/short and market neutral strategies and he has seen 20.9% annualized returns from 2001 to 2007 at his hedge fund. However, he sees Jana's future as an evolution of strategy to a more activist focus where he can institute change at companies through a focus on management. While we haven't covered Barry Rosenstein's firm yet in our hedge fund portfolio tracking series, we will be doing so shortly so be on the lookout. In that update, we will be going over the most recent changes to their entire portfolio of long US equities.

Taken from Google Finance, Convergys is "engaged in relationship management. It has three segments: Customer Management, which provides agent-assisted services, automated self-service and technology solutions; Information Management, which provides business support system and operational support system (BSS/OSS) solutions, and Human Resources (HR) Management, which provides global human resource business process outsourcing (HR BPO) solutions."

Here's the latest commentary from Eric Sprott's hedge fund Sprott Asset Management. Their August market commentary is entitled 'Beyond the Stimulus.' As always, great insight from them and recommended reading. Last week we also posted up another piece of theirs entitled 'Gold: The Ultimate Triple-A Asset.'

Just wanted to let everyone know that Newstex interviewed yours truly for their 'Blogger in the Spotlight' series and they just recently posted it up. The interview encompasses blogging topics rather than finance, but those of you interested in checking it out can see our interview here.

Soros is well known for the outstanding returns generated with Jim Rogers at their now defunct Quantum Fund. (We've summed up Jim Rogers' portfolio and thoughts a few months back). Soros is a true global macro players and dabbles in currencies, equities, bonds, commodities, etc. So with that said, due note that the equity positions listed below are only a fraction of their portfolio overall. It has been an interesting time to be investing and trading as Soros noted in his thoughts on his portfolio from 2008. Last year, Soros Fund Management finished up 8% as he made money by betting correctly on the US Dollar and short term UK interest rates.

In our recent hedge fund coverage, we noted that Soros has likened credit default swaps to 'instruments of destruction,' which we thought was interesting. In terms of SEC filings, Soros' fund has filed 13G's on Exar, disclosing a new position and also on Extreme Networks (EXTR). The following were Soros Fund Management's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some Increased Positions (A few positions they already owned but added shares to)Allied Nevada Gold (ANV): Increased by 4,242% (was previously 0.01% of their portfolio and is now boosted up to only 0.45% of their portfolio)Covanta (CVA): Increased by 1,185.5% (was previously a 0.11% position for them and is now 1.89% of their portfolio)AT&T (T): Increased by 691% (boosted from 0.05% of their portfolio up to 0.47% of their portfolio now)Allegheny Energy (AYE): Increased by 259% (from 0.13% of their portfolio up to 0.55% of their portfolio)Flextronics (FLEX) Bond: Increased by 141%Plains Exploration (PXP): Increased by 81.8%Tech Data (TECD) Bond: Increased by 77%Hess (HES): Increased by 40%RF Micro (RFMD) Bonds: Increased by 37.9%LSI (LSI) Bonds: Increased by 19.4%

Top 15 Holdings by percentage of long portfolio *(see note below regarding calculations)

Petroleo Brasileiro (PBR): 9.58% of portfolio

Hess (HES): 6.56% of portfolio

LSI Corp (LSI) Bond: 5.85% of portfolio

Linear Technology (LLTC) Bond: 5.2% of portfolio

Petroleo Brasileiro (PBR-A): 4.68% of portfolio

RF Micro Devices (RFMD) Bond: 4.42% of portfolio

Potash (POT): 4.4% of portfolio

Plains Exploration (PXP): 4.25% of portfolio

Tech Data (TECD) Bond: 3.96% of portfolio

RF Micro (RFMD) Bond 2nd set: 3.7% of portfolio

Flextronics (FLEX) 1%10 Bond: 3.2% of portfolio

Covanta (CVA): 1.9% of portfolio

Autozone (AZO): 1.9% of portfolio

Audiocodes (AUDC) 2% 24 Bond: 1.6% of portfolio

Entergy (ETR): 1.6% of portfolio

Similar to Soros' Q1 2009 portfolio, their second quarter portfolio is heavily laden with convertible bonds. Seven out of their top 15 positions are in bonds, with LSI and Linear Technology their top picks in that regard. They boosed their Flextronics Bond position by 141%, their Tech Data Bond position by 77% and their LSI Bond position by around 20%. So, they were still liking those names over the course of the past quarter.

Turning to their equities moves, we see a few things worth pointing out. Notable sales include Soros completely dumping their shares of Conoco Phillips (COP). Additionally, they sold off a large portion of their Petroleo Brasileiro (PBR) shares for a second quarter in a row. Even after all their sales, their PBR stake is still their top holding. However, they did add to their A-shares position in Petroleo Brasileiro (PBR-A).

Soros also sold completely out of Macy's (M) and Union Pacific (UNP) which had previously been 1.94% and 1.08% positions for them respectively. Additionally, they reduced their Potash (POT) stake by 65% which we took note of because Soros Fund Management has typically been fond of the fertilizer play. They did boost their Hess (HES) position by 40% which was notable. The vast majority of other positions they added to were fairly small stakes last quarter and so their percentage increase is large on a quarter by quarter basis. However, these holdings are still only fractions of Soros' overall portfolio and not necessarily worth pointing out at this stage. The last major equity move we want to point out was their 1,185% boost in their Covanta (CVA) position. While it is only now a 1.89% portfolio position for them, CVA has been popping up in a few hedge fund portfolios that we've noticed so it might be worth keeping an eye on that one.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $4.19 billion this quarter compared to $4.5 billion last quarter, so a slight decrease. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. In reality, the percentages are more watered down in their actual hedge fund portfolio. If you were to calculate percentage weightings in the actual hedge fund portfolio, they would obviously be different since you would divide position sizes by their total assets under management.

Even though Art Samberg's hedge fund Pequot Capital is shutting down, we are still covering their last slew of SEC filings. In his goodbye letter, Art Samberg revealed that their Matawin and Special Opportunities funds will become separate entities. So, we are just covering the last slowly dwindling days of Pequot as they wind everything down. Their most recent SEC filings include their 13F and an amended 13G.

Firstly, we start with the 13G they amended on Impax Laboratories (IPXL). Due to activity on July 31st, 2009, Pequot has completely sold out of this name and now shows ownership of 0 shares. Secondly, we turn to their 13F filing where their hedge fund still shows a number of US equity long positions. However, keep in mind that this filing shows their holdings as of June 30th, 2009. But, if you wish to discern which positions they are most likely to liquidate (if they haven't already), you can check out their full 13F filing with the SEC here. Notable large positions include Chipotle Mexican Grill (CMG-B), IMAX (IMAX), Impax Laboratories (IPXL), Jack in the Box (JACK), and McDonald's (MCD).

We've also detailed numerous other changes to Pequot's portfolio recently. We noted all the changes to various 13G filings they made in this post. Additionally, we noted their sales of Akorn (AKRX). On the blog we often tracked the commentary of Pequot's Chief Investment Strategist, Byron Wien. (Read his July letter here). Since Pequot is shutting down, Wien has moved to The Blackstone Group as Vice Chairman of Advisory Services. Prior to Pequot, Wien was Chief Investment Strategist at Morgan Stanley.

Other recent news out of Pequot indicates that they have been cited in 44 reports since 2005 from securities exchange 'watchdogs' who alert possible insider trading misconduct. The trades connected to wrongdoing by Pequot include Google (GOOG), Cox Communications, International Securities Holdings, and Premcor amongst many others. Many of the reported infractions come from companies that were subject to takeover bids. For instance, shares of Premcor were up 18% after it was announced they were being bought out by Valero (VLO). We'll continue to monitor the developments in this regard, but their source of downfall is pretty evident. Art Samberg himself has cited the negative cloud hanging over Pequot as a main reason for shutting down. They had a large image problem and that's tough to overcome on a Wall Street that is now more focused on regulation than ever.

*Update: Letter removed per request of representatives from Elliott. Read on at the bottom of this entry if you want another way to view it.

Very in-depth and analytical commentary out of Elliott Management in their recent second quarter 2009 letter to investors. The hedge fund has penned a 24 page letter covering topics of risk management, the automotive industry, regulation, distressed assets, arbitrage opportunities and much, much more. We highly recommend taking the time to peruse through this lengthy and informative hedge fund investor letter.

Elliott Management was founded by Paul Singer back in 1977 and managers over $12 billion today. They typically focus on distressed investments and back in their first quarter letter mentioned that all the government spending and bailout activity could potentially make the economy worse. RSS & Email readers will need to come to the blog to view the embedded letter.

You can try to download the .pdf directly here if the link still works. Do note that the document is hosted by Scribd, not MarketFolly. If you really want to read the letter it is most likely floating around somewhere on Scribd's site.

Thanks to a reader in Toronto for the latest from hedge fund Salida Capital. This special report looks at Chinese metal demand going forward and their findings are interesting. RSS & Email readers will need to come to the blog to view the embedded document. Alternatively, you can try to download the .pdf here, assuming the link still works.

In a 13G filed with the SEC, Bret Barakett's hedge fund Tremblant Capital Group has disclosed a 6.78% ownership stake in IMAX (IMAX). The 13G was filed due to activity on August 12th, 2009, and they now own 3,744,749 shares. In their most recent 13F filing which details positions as of June 30th, 2009 we see that Tremblant owned 1,499,343 shares of IMAX. In the time elapsed from July 'til now, Tremblant has purchased 2,245,406 more shares.

Taken from Google Finance, IMAX "together with its wholly owned subsidiaries, is an entertainment technology company specializing in motion picture technologies and large-format film presentations. Its principal business is the design and manufacture of large-format digital and film-based theater systems, sale or lease of such systems, and the conversion of two-dimensional (2D) and three-dimensional (3D) Hollywood feature films for exhibition on such systems worldwide."

Monday, August 24, 2009

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

Next up is Stephen Mandel's Lone Pine Capital. The term 'Lone Pine' comes from Mandel's days at Dartmouth College, where the school has a historical lone pine tree. Mandel's $7 billion hedge fund has returned over 25% annually since its inception in 1997, but had a rough year in 2008. He is well versed in the ways of finding undervalued companies and he typically likes to sniff out solid companies with good management that are trading below their intrinsic value. Before setting up Lone Pine, Mandel was one of Julian Robertson's top associates at Tiger Management. As such, Mandel is known as one of many 'Tiger Cubs,' or managers that have gone on to start their own funds after Tiger. In Alpha's 2009 hedge fund rankings list, Lone Pine was ranked 21st.

The following were Lone Pine's long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions(Brand new positions that they initiated in the last quarter):McDonalds (MCD), Hewlett Packard (HPQ), Nike (NKE), Smithfield Foods (SFD) - (we already knew about this addition back in June because we covered their 13G filing on SFD), Ecolab (ECL), Liberty Media (LMDIA), Melco Crown Entertainment (MPEL), Southwestern Energy (SWN), and Pactiv (PTV). The rest of their new additions are all less than 0.5% of their portfolio each: Fifth Third Bancorp (FITB), Grupo Aeroportuario (PAC), Grupo Aeroportuario (ASR), Mindray Medical (MR), Suntrust Banks (STI), Progressive (PGR), and Discovery Communications (DISCA).

Some Increased Positions (A few positions they already owned but added shares to)Vistaprint (VPRT): Increased by 597%. This figure is already outdated though as Lone Pine has since boosted their VPRT stake again already.Coca Cola (KO): Increased by 99.9%Strayer Education (STRA): Increased by 63.3% (they filed a 13G on STRA back in March)Deltek (PROJ): Increased by 61.6%

Lone Pine seems to like the large cap 'global brand' plays this quarter. We say this because they added brand new positions in Hewlett Packard (HPQ) and Nike (NKE). They also started a new position in McDonald's (MCD) which is intriguing because we also saw Bill Ackman's Pershing Square buy MCD as well and obviously they both see something compelling there. Lone Pine also doubled down on their stake in Coca Cola (KO), furthering the 'global brand' meme.

Their portfolio also exuded a fondness for replacing names in various industries. For instance, in the education arena, they sold out of Apollo Group (APOL) but boosted their holdings in Strayer Education (STRA). (Stephen Mandel recently recommended STRA at the Ira Sohn conference where numerous hedge fund managers presented investment ideas). In the area of gaming and casinos, Lone Pine sold out of Las Vegas Sands (LVS) but added a new stake in Melco Crown (MPEL). Then in terms of consumer goods, they sold out of Pepsico (PEP) and doubled their stake in Coca Cola (KO). So, it appears as if they've found greener pastures in each of those industries.

Lone Pine also did some significant selling across the portfolio as they significantly reduced their plays in SPDR Gold Trust (GLD) Calls, Union Pacific (UNP), and Mastercard (MA). They also sold shares of numerous other companies listed above in our 'reduced' column. The moral of the story is that Lone Pine was out trimming positions all over the place.

Lastly, while 13F filings do not cover international holdings, we have gone to the overseas regulatory bodies and have started tracking Lone Pine's UK positions as well for those interested.

*Note regarding portfolio percentages: Assets from the collective holdings reported to the SEC via 13F filing were $7.37 billion this quarter compared to $8.7 billion last quarter, so a noticeable drop in assets invested on the long side. Please keep in mind that when we state "percentage of portfolio" for calculations, we are referring to the percentage of assets reported on the 13F filing, not their total assets under management.

Noted trader and author of The Gartman Letter, Dennis Gartman is now set to do something he has dreamed about for some time: start a hedge fund. Gartman started his hedge hedge fund, The River Crescent Fund on August 17th and is trying to raise $200 million over an elongated time period. While Gartman would not name names, he has said previously that some "well known hedge fund managers" have already invested.

His fund will essentially run based off the recommendations he has made daily in his Gartman Letter. It is currently long soybeans and short wheat in an agriculture trade. In currencies, he is short the euro but long gold. This is Gartman's forte as he is always hedging his bets and playing two sides of a trade. His hedge fund will trade equities, crude oil, metals, agricultural commodities and more. So, it seems as if he'll take a global macro approach to running the fund due to the multitude of asset classes he'll be trading. Back in June, we saw that Gartman sees both inflation and deflation and so it will be interesting to see how quickly he moves in and out of positions as he is not a daytrader and typically holds positions for numerous days or even weeks. Additionally, back in February he said he saw gold becoming the world's second reserve currency. His current long gold position certainly reflects this view.

While this most likely means we'll be seeing much less of Dennis Gartman in the media, we'll still keep an eye on his movements regardless. After all, he is 'old school' in his ways and that's why we follow him. He's given great advice in the past, telling people to watch the base metals for signs of economic recovery. Additionally, he's laid out his rules of trading here and we highly recommend reading them. You can certainly bet that he's implemented those as founding principles of his new hedge fund.

In an amended 13D filed with the SEC due to activity on August 19th, 2009, Philip Falcone's hedge fund Harbinger Capital Partners has disclosed a 70.7% ownership stake in SkyTerra Communications (SKYT). Shares of SKYT are traded in OTC markets and Harbinger's ownership position is via numerous asset types and we thought it would be best to just post up verbatim what they filed. Courtesy of the SEC, tons of legal jargon for your perusal and enjoyment:

Harbinger had a tough 2008 as they were ranked #1 in the top 10 asset losers, losing 60.8% of assets on a year over year basis as their Offshore fund finished -22.7% for 2008. Also, we got word that Falcone would be returning to his roots in terms of investing style and would be opening a new fund.

Taken from Google Finance, SkyTerra Communications "operates its business through its subsidiary, SkyTerra LP, which focuses to develop, build, and operate a next generation mobile satellite system. The Company has five subsidiaries: SkyTerra GP Inc., SkyTerra LP, SkyTerra (Canada) Inc., SkyTerra Holdings (Canada) Inc., and SkyTerra Finance Co. SkyTerra LP offers mobile satellite services using two nearly identical geostationary satellites that support the delivery of data, voice, fax, and dispatch radio services."

Quick word from one of our sponsors: The folks over at Quicken have been nice enough to keep us updated with their latest promotions. So, just wanted to pass along to our readers that Quicken has $20 discounts on all their software (Premier, Deluxe, Home & Business, and Rental Property Manager) from now until the middle of September. Don't forget that you can also get free quicken online too. And now back to your regularly scheduled MarketFolly programming.

If you haven't heard already, Grant's Interest Rate Observer has gone partially free. You can get their Summer Break 2009 Issue for free via .pdf here. It is 24 pages chalk full of great information. Definitely check it out as Grant's has great commentary. And hell, it's free.

The OptionAddict is back with his latest weekly watchlist of trading setups found via some good 'ol technical analysis. The video is embedded below where he swings through some charts and patterns. RSS & Email readers come to the blog to watch the video. Enjoy:

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